This month, the UK Law Commission published a scoping paper looking into how Decentralised Autonomous Organisations (DAO) can be characterised and how the law of England and Wales might accommodate them now and in the future. The paper seeks to identify current issues around DAOs to inform any future law reform or innovations.
What are DAOs and how the current law treats them?
According to the paper, the term “DAO” describes, in very broad terms,
a new type of online organisation using rules set out in computer code.
DAOs are part of many crypto ecosystems. A DAO will generally bring together a community of participants with a shared goal – whether profit-making, social or charitable – often with some control over governance matters distributed among participants through the use of distributed ledger technology (DLT) and smart contracts.
The paper says the term DAO does not necessarily indicate a particular type of organisational structure and, therefore, cannot imply any specific legal treatment. The question of what legally speaking is a DAO can be exemplied by the following:
For example, does it use a limited company or trust structure? Or, if it has not actively adopted a recognised legal form, how can it be characterised in legal terms? For example, could it be characterised as a general partnership or unincorporated association, or is it simply an arrangement of multilateral contracts between different participants?
There are other follow-up questions around:
who is liable for the actions of the DAO and how they can be held accountable;
which jurisdiction's law apply to determine these questions, particularly when the DAO has not adopted a recognised legal structure that links it to a specific jurisdiction;
to which jurisdiction's tax and regulatory rules is the DAO subject.
Ultimately, the paper says that the answers will depend on where a particular DAO sits on the "spectrum": is it a pure DAO, a digital legal entity, or some hybrid arrangement? The paper provides further details on each of these models on different ends of the spectrum.
The paper goes on to consider the overall attractiveness of England and Wales as a jurisdiction for DAOs, and identifies areas where further work might be useful to accommodate and regulate DAOs:
There is no current need to develop a DAO-specific legal entity for England and Wales, however, the Government should keep this matter under review.
The Companies Act 2006 should be reviewed in order to determine whether reform is needed to facilitate the increased use of technology at a governance level where appropriate. The law of other business organisations such as LLPs should also be reviewed with the same aim.
Further work could be undertaken to determine whether the introduction of a limited liability not-for-profit association with flexible governance options would be a useful and attractive vehicle for organisations in England and Wales, including non-profit DAOs.
Proceeding with the Law Commission’s planned review of trust law under the law of England and Wales. This will consider – in general terms rather than in the DAO context specifically – the arguments for and against the introduction of more flexible trust and trust-like structures in England and Wales.
Government should consider a review of anti-money laundering regulation in England and Wales to consider whether the same policy objectives can be achieved in a manner more compatible with the use of DLT and other technology.
The legal characterisation and treatment of DAOs has been the focus of many governments and scholars in recent years. This topic has become more important as regulators have sought to apply the existing regulatory perimeter to DAOs (e.g. The US Treasury Department sanctioned the Tornado Cash DAO protocol as an entity) and courts are starting to face these tough questions.
Similar to previous work done by the UK Law Commission, this scoping paper is likely to have a significant influence on how regulators and courts, especially those in the common law world continue to apply and develop the law to accommodate innovative governance models like DAOs.
Written by J Huang and S Pettigrove
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